1. Passion

   The first question that every businessmen/women or should ask themselves is how passionate are they about their line of business? Are you doing it because it is the business in vague? Or are you doing for the burning passion that you have for. Like a friend of mine once said “passion gives rise to action”. If the business is not something that you have flair for, you will not be fulfilled.

2. People

   People (employees and customers) are your most potent asset. You will succeed in your line of business when you how to get along with people. Like the golden says: “do unto others as you would want them to do unto you”. If you don't treat your employees and customers properly, it will eventually rub off on your business venture. In your business pursuit this should be your mantra: “people count”.

3. Place

   If you desire to sell your product or service or both, then you must get a location that tells people that you have arrived. Willie jolley, a business consultant calls it: “you show up to go up”. Many businesses fail because they are poorly located. Your location determines your allocation. It is imperative that you occupy a strategic location if you are desirous of making profitable sales.

4. Packaging

   Researchers all over the world have proven that 80% of your sales are determined by your packaging. How attractive is your product/service? How do you relate to your customers? Your employee plays a very vital in determining the success of your business because they are the one that deal directly with your customers. It is your packaging that attracts your prospects to your product.

5. Persistence

   Doing business you will agree is no child's play. In the course of doing business you will be face with several issues that border on the market, competition, laws, and employees. But with persistence and hard work, you will build your dream business. Everything remains in a state of rest until a force is applied.

Step one in starting a business is making sure you have selected a business that you like, are qualified for, and has a profitable business model. You can easily ruin your life in the short-run, have no fun, and ruin your finances if you have not researched your market and made sure that there is indeed money to be made in the business you have selected. Note that you do not have to be the first person in that market or even come up with something innovative. The world thrives on competition, and if you can do something better, different, cheaper, faster, or in a more unique way than someone else, then you can enter that market and be successful. If you want some thoughts and motivation, read Michael Masterson's book, Ready, Fire, Aim, available on Amazon.com. One inspirational aspect of Michael's book is that he encourages you to just get out and try your business early, and don't worry about making everything perfect. You can do that if the business starts making money. By doing this, you can keep trying until you hit upon a successful formula. It's OK to fail, but keep trying until you successfully started your business.

Step two in starting a business is doing some basic planning to get your business up and running smoothly. One recommendation is to incorporate or form a limited liability company through which you will conduct your business. If properly formed and operated, an entity like this will protect your personal assets from exposure in case you injure someone accidentally in your business. For example, if you are running a flower shop, and a customer slips and falls in your shop, if the customer sues you for her medical costs, she cannot get more than the assets of your business; she will not be able to get to your other personal assets. Two pointers: form your business correctly and maintain separate books, records, and checking accounts from your personal affairs. Commingling of cash and property - business and personal - is a no-no, and can result in your losing the limited liability protection of the corporation or limited liability company. Get a good attorney to help you form your entity properly - it should not cost more than about $2,500 - $3,000 in most high-cost areas, and less in lower cost areas of the country.

Step three: Get going! You have a business plan, you are excited by running your own business, and you have formed your business properly. Get out there and attract customers. You will need to market your product or service on the web, with signs, by direct mail - in whatever manner is likely to reach your potential customers. When you get a customer, go out of your way to serve them well. Your customers' referrals could be a great source of new customers. Get your suppliers in order and try to work out paying them after they invoice you - typically that will give you 30 or 45 days to pay. That will provide some time to get your business going, but treat your suppliers well too, and if there are any hard times, perhaps they will return the favor. Good luck with your business! I hope to buy from you soon!

If you are investing in real estate and renting or leasing out your property you have to be aware that there will be upkeep of the property that is your responsibility and this might also eat up the profits. Most of the time a deposit is required when a property is rented out but sometimes the cost of repairs out weigh the deposit. Many renters do not respect others property and will destroy the property then move on when their rent is in arrears. Having a good lawyer on hand will also be a good idea unless the amount of damage is low enough to take the tenants to small claims court. Each state has a different limit that is allowed for small claims cases. This may or may not apply in other countries. All countries have their own laws pertaining to real estate. If you invest in real estate in other countries make sure you know the laws there. Many people are buying property in other countries and are successful at making a profit from it.

Buying a house to fix up and sell for a profit is known as flipping. If you can purchase the property and fix it yourself, you will make a much larger profit. Plus the quicker you can sell it the more profit you will make. Buying, remodeling, and selling property is hard work, and is not for those who want to sit in an office and take or make phone calls. If you are looking for cheap real estate with very little remodeling or repairs needed, it is going to take some research and footwork. Do your homework and research the business before you jump right in expecting to get rich in real estate. Yes there are some who have gotten rich in investing in real estate but it took a lot of work and persistence.

Have I scared you enough? Let's talk about the first steps:

First off, if you are 100% serious about starting a business, specifically an online one, I congratulate you. You have already laid down the foundation. The things you must remember about running ANY business, just starting out, or being a seasoned pro are these:

1. Never lose your determination
   
2. Set goals
   
3. Be realistic
   
4. NEVER QUIT

It's simple in the sense of saying, but almost impossible to stick by in the beginning.

It's a proven fact that most businesses close their doors within the first year. A lot of it has to do with poor financing, unrealistic goals, or a lack of interest. Keep this in mind when you are struggling through the first year.

Since you are utilizing an online business, there are a number of positives and negatives in terms of the first steps in making you're business a successful one.

Positive

1. Know you're business. Is it retail based, service, etc?
   
2. Know you're product. What are you selling or offering?
   
3. Know you're customer. Who are you selling to? What age group, Gender, nationality?

Negatives

1. Don't be biased. Never market to one particular group of people
2. Don't pay outrageous hosting fees for you're website
3. Make site readable and easy to follow

The last one sounds easy, however, it's not. This one takes a while to tweak, and since you are just starting out, you may want to add an e-mail ability that allows users to write comments about the site itself. What do they want changed, added? Remember, the site is for the customer, you may think it looks horrible, but the overall site construction should be a representation of what you're customers want. Start out with a site template, work from there.

I hope these steps can help you understand the process you are going to be getting into. I have complete respect for people who are wishing to break the chains of traditional workmanship and forge their own path. I did it.

Information

Information is the life blood of marketing and you can use polls to collect vital details about the sort of people who visit as well as the more formal information about their thoughts on a product.

You can ask a straightforward question. For example, if you sell marmalade, you can ask: "What sort of Marmalade do you like?", and list various flavours. The answers will tell you the types liked and their order and this sort of information is useful, particularly if you have just introduced or will introduce a new product.

But as well as this, it tells you something equally useful. It tells you how likely your visitors are to respond to your polls since you can compare the number who answered as a percentage of the number who visited. If there is a wide discrepancy then you may need to look at the sort of polls you publish and be aware that you might not be getting good information back.

As a general rule, people like polls, seeing them as harmless ornamentation and entertainment. They also like to interact and feel part of the site and having an easy outlet for their preferences and ideas is useful in building sites that retain and encourage visitors. Again, if you don't get the results you expect, you may need to rethink the wording you use.

Of course, you can also ask questions that elicit other, more pertinent, information that is of use in planning your marketing and this area needs careful thought. Whatever you do, don't dash off a quick poll when a few minutes thought could have resulted in something that generates more relevant information.

It really is as easy as thinking what you would like to know and then producing a poll that is both interesting and fun to do and, thus, will be well supported.

Real Marketing

There are as many ways to use polls in real marketing as there are products. For example, if you sell t-shirts with a racing car motif you can use a Formula 1 or a Rally poll. It's a popular subject so visitors will probably be knowledgeable and enjoy putting their opinions and you will ensure that your t-shirt image and details are presented nearby, ready to receive the clicks.

In the same way, if you are marketing a new product or service you can use a poll to put the idea into the heads of visitors without making it too obvious what you are doing. If you have a new line in CDs, for instance, you might prepare a poll about the life of a singer to prompt buying of a new track or book.

There are many possibilities for using polls in this way that simply prompt people to think particular thoughts or think about a particular type of product. This can be very powerful since, for the most part, people will be unaware of the suggestion that is happening.

Polls like this take little preparation or implementation, they can be changed frequently and act as colourful additions to websites. The only problem is in integrating a poll policy into your marketing structure and then thinking what questions to ask and what answers to suggest.

However, I believe that, with thought, polls can act as clever marketing tools for the astute website owner who knows how to exploit and use them.

Many are not aware of the fact that the issue of business ethics is a happening and on the rise topic these days. This could be because we do not see headlines of business corruption or scandals on the local media that often. However, the former so-called boring subject of studies has become a major and important interest recently. With corporate scandals and multibillion dollar bankruptcies on headlines for more than a year and giant companies that were once considered as successful such as Enron and Worldcom on litigation, making business ethics a matter that have to be looked upon to in detail.

In the case of Enron Corp for example, they have failed to follow the basic principles of accounting for the sake to provide a false healthy view of profit generation in their organization. They had been using inappropriate accounting techniques to an elaborate use of special purpose entities to hide liabilities through off-balance-sheet accounting. This is indeed only one of their schemes. There were more that were obviously misleading and clearly providing only up to their own benefit and not the stakeholders.

On the surface, this topic could be view as universal at first; nevertheless there are still conflicting ideas of what should govern the solution to all business problems. There are parties that states although that the studies of business ethics is undeniably effective and relevant, the business and the internal control should be more focus on the what drives the business and understands it, in order to overcome many business conflicts and problem. In one way or the other, this should not be the issue because business ethics clearly states as an ongoing subject and deals with conduct directly. It is not merely a proxy of guidelines. It has its own grounds and value.

Besides further explaining the importance of business ethics in business organization, it is crucial to confine clearly and state the advantages of business ethics and how it works to combat many business problems. Thus, building the fact that business ethics should be the main tool in reducing company frauds and to restore the confidence of the public.

One issue that could be closely related to business ethics is fraud. The result to the research in the United States by the Association of Certified Fraud Examiners (ACFE) in 1996 and 2002 shows that the estimated losses from fraud and abuse to be 6 percent of annual revenue, approximately about $600 billion. This figure may have increased over the years until today. The truth is that the actual figure of the loss is difficult to quantify due to reasons such as not all frauds are detected and even if it is, not all are reported. There are many other reasons that contribute to this problem. It is believe that fraud is a hazardous problem that occurs in all firms without exception, whether it is direct or indirect. Fraud is indeed an inevitable constantly occurring problem. Fraud is a matter of moral issues, and it can resolve to business ethics for solutions. Hall (2004) stated that:

Fraud denotes a false representation of a material fact made by one party to another party with the intent to deceive and induce the other party to justifiably rely on the fact to his or her detriment. Fraud in the business environment has a more specialized meaning. It is an intentional deception, misappropriation of a company's assets, or manipulation of its financial data to the advantage of the perpetrator. In the accounting literature, fraud is also commonly known as white-collar crime, defalcation, embezzlement, and irregularities. (p. 126)

The most substantial issue here is the relationship between fraud and business ethics. There are claims that stated frauds are of nature and occur nonetheless with or without the existence of business ethics dues to many enduring external factors. These factors are described as opportunities which place a person in a situation that enables them to commit the intended fraud. These opportunities too are of external in nature. Likewise, meaning to say that fraud is something that is out of a person's control and anyone could have done it. However, come to the main concern that fraudulent activities and business ethics are of close relation because both have dealings with moral aspects. Also, moral aspects is part of the build of a person's personal characteristics and in one way or the other, effects how deep a person could be dragged down through situational pressure that may be caused by the external factors mentioned before.

The bottom line is that business ethics initially outline the best of an individual personal integrity as well as ways to overcome business related pressures and influential opportunities. As suggested by Witzel (2002), “That the virtuous businessman was a virtuous man in general.” (p. 4). From his words, it can be extracted that a person who has good grip of business ethics and cautiously monitors his conduct to ensure his own integrity is most unlikely to be committing frauds. Indeed, business ethics may not be able to eliminate thoroughly the issue of fraud. Rather, it is the key feature as a set of control for reducing fraudulent activities in an organization.

Business ethics may have deals with a lot of other matter besides frauds and another importance of it is in its potential in restoring back the confidence of the public. Public confidence is a crucial matter and essential element in the existence of many firms. It is the survival factor of firms and without or lacking of it could cause catastrophe in any business entities.

One factor that has the tendency to erode the confidence of the public is internal conflict. Four main ethical conflicts confront leaders and managers in business as stated in a journal titled why discuss international business ethics? (2001) are:

Conflict of interest: an individual may be able to achieve personal gain from a decision he or she makes. Loyalty versus truth: an individual must decide between loyalty to the company and truthfulness in business relationships. Honesty and integrity: an individual must decide whether to be honest or lie, and whether to take responsibility for decisions and actions or blame someone else. Whistle-blowing: an individual must decide whether to tell others (media or government authorities) about the unethical behavior of the company or institution. (p. 40)

A company with a lot of internal conflict of interest will definitely affect the confidence of the people towards the company itself. Because of the term used is "official duty", the issue of business ethics is able to come into the whole picture. Business ethics deals directly with misconduct in the company and it is usually of the misuse of official rights in the company as well as irresponsible actions taken by the officials themselves. For example, you work for government and use your official position to secure a contract for a private consulting company you own. Another instance is using your government position to get a summer job for your daughter. Thus to say that conflict of interest is in direct relationship to the issue of public confidence and business ethics.

Some parties do question how business ethics could promote public confidence by saying that the matter of people's confidence is very much related to the company's performance itself and not to what extend business ethics they have adopted. But technically, business ethics deals with good ethical behaviours and thus good for a business in overcoming conflict of interest align with the objective of restoring the confidence of the public towards the company. In other words, it is to say that the best medium in promoting and restoring confidence for a company is by properly adopting business ethics.

Business ethics is not merely a current topic since it was discussed about way back hundreds of years ago. There are parties that maintained their bias ideas with regards to business ethics. These groups of people just could not accept business ethics as a solution to any business problems due to the nature of "business" itself. Even to this day, there are parties that feel that business ethics should be looked at as oxymoron; some ideas that is expressed contradictory to what is really happening. In other words, it is to say that business ethics is dysfunctional proxy of morality per se. This is due to their claim that said all commerce involves the exploitation of mankind by mankind. This can be seen from the system that governs business itself. For an example, take capitalism for instance, which promotes free market business that uses monopolizing and manipulating as their tool to gain wealth. it is argued that business ethics itself has deviate from its own purpose, and this is because of the business itself is unethical in nature. In short, business ethics is unable to prove anything as true and fair, what more than to reduce fraud or restore the public confidence.

But, this is simply a wrong assumption. It is true that business ethics can be seen in many different dimensions but to say that business ethics is immoral because business itself is unethical is somehow a shallow conception. There is no immorality in business but rather the acts of human could change it to be immoral. Ethics is needed in controlling and well as reducing these faults, such as fraud. In addition, a person with good moral conduct and ethical in behavior will surely win the trust of other people. That is why, a company that imposes and follows a good set of business ethics is look upon to and trusted by others. Besides that, business ethics is a dynamic subject because it adapts to what is current and what is past. The issue of whether business ethics could or could not be trusted should not in the first place be questioned. However, since there were so many groups of people trying to make business ethics look bad, people should go back direct to what is basic. Business ethics is used as to maintain ethical behavior in business dealings and should not be lop-sided in any case, as in the stakeholders' case. A company, by adopting proper business ethics will surely be able to maintain the stability of their company's existence, and along the way, comply with human values in life.

After having found out about the Dividend the company pays, you would be interested in knowing the profit which the company has made which is available to the shareholder's. The company may use this profit to pay dividend or may retain this profit to grow the company. Most companies would pay a certain percentage of this profit as Dividend and utilize the balance portion for growth of the business. However this money which is utilized by the company belongs to the shareholders and is like a further investment which you have made in the company. The money which is retained by the business is carried forward to the Balance Sheet as Retained Earnings (after making provisions for certain statutory reserves which may be required).

The net income or profit which is available to the shareholder's to the Shareholder's Fund is known as the Return on Equity (ROE). In simple words it states the profit which the company has made from the investments made by the shareholders.

Formula

Return on Equity (ROE) = Net Income / Shareholder's Equity

ROE is also known as Return on Shareholder's Funds or Return on Net Worth. The result from the above formula is expressed as a percentage.

Net Income is the Net Profit which the company has earned during the period. It is the Profit After Tax which is available for distribution to the shareholder's. The Net Income is usually considered after deducting the preferred dividend, since the ROE is mostly calculated on common equity.

Shareholder's Equity includes Share Capital, any reserves which are required to be created and Retained Earnings. It is also known as Net Worth i.e. Total Assets minus Total Liabilities. In case ROE is calculated for common shareholder's preferred equity is deducted which is usually the case. ROE can also be calculated by taking the Average Capital i.e. Opening Capital plus Closing Capital divided by 2.

Example

Profit And Loss Account (Relevant Figures)

Revenue - $ 100,000

Total Costs - $ 90,000

Profit Before Tax - $ 10,000

Tax - $ 2,000

Profit After Tax - $ 8,000

Balance Sheet (Relevant Figures)

Assets

Fixed Assets - $ 75,000

Current Assets - $ 75,000

Total Assets - $ 150,000

Equity

Capital and Reserves

Share Capital - $ 50,000

Retained Earnings - $ 30,000

Liabilities

Long Term Loans - $ 20,000

Current Liabilities - $ 50,000

Total equity and liabilities - $ 150,000

Return on Equity (ROE) = Net Income / Shareholder's Funds

ROE = 8000 / (50,000 + 30,000)

ROE = 10%

Commentary

In the example above ROE is 10% which is reasonable. ROE of some of the best companies usually averages 10% to 20%. ROE of 15% is normally considered to be good for most industries. ROE below 5% requires improvement. If ROE is above 20% it is remarkable, however very difficult to sustain.

Like most ratios it is important to compare ROE calculated with other companies in the same industry.

This particular item is really a very simple use of marketing. When people sit down they are interested in specials, and drinks, and having an item like this on the table is an easy item for the customer to pick up and look at.

Most restaurants use items such as above to show off their dining specials, specialties of the house or their wine menu. It is also useful to show off special events and upcoming menu items. Items such as lists, and short paragraphs explaining a photo is all you need. Nothing further in the display and the customer will be interested in reading. The information needs to be brief. Also what needs to be remembered is the customer will more than likely be reading under poor light and not reading light. They are also dining to be with the people they came with. Anything more is just too much.

A restaurant such as Olive Garden, or Ruby Tuesday's might feature an upcoming item coming on their menu with a photo in order to get their customers interested in it, and to come back, or an item just added to the menu.

Any restaurant who wants to get information out to their customers, this is the way to go. Using an item such as this, can help to bring in more profit.

Dropshipping

Internet marketing coupled with dropshipping can offer the small businessperson a solution to both. Dropshipping involves an agreement with one of the many dropship wholesalers that can be found on the internet. These companies provide helpful services to new and existing businesses.

Generally, the agreement involves an upfront payment to the dropship wholesaler for the rights to market their products. This can range from a small number of items to over one hundred thousand unique offerings. Often the cost is not linked to the size of the company, or the number of items offered for sale.

Website Development

It is common for the top dropship wholesalers to offer websites to you that come loaded with their inventory. In some cases, using these sites will create more cost to the retailer. Even when there are additional charges involved, these rarely exceed what it would cost to hire a private web developer.

The websites provided by the dropship companies are attractive, and customized with your business name and logo. They are stocked with key words to help your site get good rankings in the more popular search engines. A good traffic flow to the website means increased sales. Checkout facilities are built into these sites to provide a smooth purchasing experience.

Inventory

Customers will purchase items for wholesale dropship. Most companies are set up so that you receive all of the proceeds of the retail sales. This allows you to set your own selling prices for the inventory. The dropship directory will include your wholesale price, the selling price, and the item names and/or inventory codes.

Customers will only see the retail price and a picture with a description of the product. You may choose to operate with a smaller profit margin to try to increase sales from your site to beat competitors who use the same wholesale dropshipper.

Dropshipping the Orders

The dropship wholesaler will ship purchased items from their inventory directly to your customer. You will be invoiced for the wholesale amount plus shipping and handling. This should allow you pay the invoice and produce a profit. It may take a little practice to get the right combination of price and quantity to maximize your profits.

Possible Problems

Start slowly with a new dropship wholesaler. Plan to solicit friends and family to test the company's ability to ship on a timely basis and provide good products. Remember, you will be responsible for the integrity of the transaction.

Know the precise return policy of the dropship company before starting to sell. This will help you to clearly state these policies before purchases are made. The best way to keep good customer relations is to be up front about these policies.

Dropship wholesaling is an excellent way to keep large amounts of inventory available without purchasing products or warehouse space. You sell the products without ever having to touch them when it works right.

There are various definitions of the term Return and Capital Employed. These are explained with the help of formulas and examples.

Formula:

ROCE = (EBIT / (Total Assets - Current Liabilities)) * 100

OR

ROCE = (EBIT / Capital Employed) * 100

Explanation of the Numerator and Denominator

EBIT = Earnings Before Interest and Tax also known as Operating Profit.

In certain cases the numerator used is Profit Before Tax. However in most cases EBIT is used as the numerator which seems to be more correct. Profit Before Tax is mainly used to calculate Return On Equity.

Capital Employed = Shareholder's Funds + Long Term Borrowings.

In other words Capital Employed is Total Assets - Current Liabilities, which is also used as the Denominator.

There are different definitions of the term Capital Employed. Thus in some cases it is defined as Total Assets.

In other cases instead of Long Term Borrowing, Total Borrowings are considered. Total Borrowings would include overdraft, short term loans and lease obligations.

Thus, in the formula above current liabilities can also be replaced by non-interest bearing liabilities.

Whether to include Total Borrowings or Long Term Borrowings would depend on the materiality of the value of overdrafts and other interest bearing short term liabilities. Thus if the value of overdraft and other short term borrowings is less then it can be ignored. This also depends on how you interpret the ratio and can be decided on a case to case basis. It is wise to include all Borrowings / Interest bearing liabilities as Capital Employed since EBIT is used in the numerator. Thus the intention is to know the return which is sufficient to bear the interest cost to maximize the shareholder's earnings.

Example 1

Profit and Loss Account for the year ended 31-12-07 (Only Relevant Figures)

Sales - $ 75,000

Operating Profit (EBIT) - $ 15,000

Interest - $ 1,800

Profit Before Tax (PBT) - $ 13,200

Balance Sheet as at 31-12-07

Fixed Assets - $ 125,000

Current Assets - $ 75,000

Total Assets - $ 200,000

Share Capital - $ 100,000

Reserves - $ 25,000

Long Term Loans - $ 25,000

Current Liabilities - $ 50,000

Total Liabilities - $ 200,000

ROCE = (EBIT / Capital Employed) * 100

ROCE = (15,000 / (100,000 + 25,000 + 25,000) * 100

ROCE = 10%

OR

ROCE = (EBIT / (Total Assets - Current Liabilities)) * 100

ROCE = (15,000 / (200,000 - 50,000)) * 100

ROCE = 10%

The ROCE needs to be compared with the Rate of Interest on Bank Borrowings which in this case is between 7% to 8%. Thus any increase in Bank Borrowings with proportionate business growth would still leave a share of 2% to 3% for the shareholders if ROCE is maintained at 10%.

Example 2

Profit and Loss Account for the year ended 31-12-07 (Only Relevant Figures)

Sales - $ 125,000

Operating Profit (EBIT) - $ 20,000

Interest - $ 15,000

Profit Before Tax (PBT) - $ 5,000

Balance Sheet as at 31-12-07

Fixed Assets - $ 175,000

Current Assets - $ 150,000

Total Assets - $ 325,000

Share Capital - $ 75,000

Reserves - $ 25,000

Long Term Loans - $ 100,000

Current Liabilities

Creditors - $ 50,000

Bank Overdraft - $ 75,000

Total Liabilities - $ 325,000

Calculation of ROCE without considering Bank Overdraft

ROCE = (EBIT / Capital Employed) * 100

ROCE = (20,000 / (75,000 + 25,000 + 100,000)) * 100

ROCE = 10%

OR

ROCE = (EBIT / (Total Assets - Current Liabilities)) * 100

ROCE = (20,000 / (325,000 - 125,000)) * 100

ROCE = 10%

Calculation of ROCE considering Bank Overdraft

ROCE = (EBIT / Capital Employed) * 100

ROCE = (20,000 / (75,000 + 25,000 + 100,000 + 75,000)) * 100

ROCE = 7.3%

OR

ROCE = (EBIT / (Total Assets - Non interest bearing liabilities)) * 100

ROCE = (20,000 / (325,000 - 50,000)) * 100

ROCE = 7.3%

The interest rate charged by the Bank is between 8% to 9%. In this case it is better to consider Bank Overdraft in the ROCE calculation, since it gives a more realistic figure of 7.3% on the Capital Employed. Thus any increase in Bank Borrowings either Long Term Loans or Bank Overdraft is going to affect the Shareholder's earnings. It may result in reduction of Shareholder Earnings in case the EBIT growth is proportionate to the growth of Capital Employed when the increase in Capital Employed is mainly by way of increase in Borrowings.

One factor which needs to be considered here is whether there is a sudden increase in the Bank Overdraft towards the end of the Accounting Period for which the ROCE is calculated. If this is the case then it is better to consider the annual average, instead of the year end value. If the annual average is not material then it can be ignored. One way of determining whether the Bank Overdraft is of significant value or not during the year is to analyze the interest (finance cost) incurred during the year and the rate of interest charged by the Bank. In case the interest on the Long Term Borrowings is approximately close to the total interest (finance cost) then it can be assumed that the Bank Overdraft value is not material.

Conclusion

ROCE gives us an indication of how the company is utilizing its capital and whether the company is making enough earnings to cover its cost of capital. The ROCE needs to be compared with other companies in the industry since certain companies are capital intensive and thus may have a lower ROCE.

ROCE also needs to be compared with the interest earned from the Bank. In case interest earned %age is higher than management could consider investing the money in the Bank instead of investing in business.

ROCE earned from one business or one project can be compared with other business / project to increase the investment in the business which gives the best ROCE.